(What’s Left of) Our Economy: The Case that Phase One Passes the Enforceability Test

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China, enforcement, Phase One, tariffs, Trade, trade deal, trade talks, Trump, unilateralism, {What's Left of) Our Economy

Not only has the “Phase One” trade deal now been signed by the United States and China, but official texts have now been released. And my initial read indicates that the Trump administration just might have come up with an effective enforcement regime – though success here will depend on U.S. governments (including this one) displaying nerves of steel.

At the same time, the enforcement terms raise the question of why the President felt the need to reach this point via a treaty, rather than simply punish China unilaterally for economic transgressions – as his tariffs on hundreds of billions of dollars worth of imports from the People’s Republic (most of which remain firmly in place) already accomplish.

By way of background, from the beginning, I’ve doubted that any such agreement could be adequately verified from the U.S. standpoint. The main reasons: The bureaucracies China uses to implement the various features of its trade and broader commercial predation are too big and secretive for any outsider to monitor in any meaningful sense. (Further complicating matters – many of the worst culprits are provincial and city governments.) Therefore, documenting abuses in any kind of detail – or verifying any Chinese promises of structural change – has looked like an insurmountable obstacle to standard, legalistic dispute-resolution systems that could actually work satisfactorily for American plaintiffs.

As a result, I’ve argued that the best way to handle these transgressions is for the U.S. government to impose sweeping tariffs on China (because its predation is a systemic plan, not the product of individual entities’ decisions), and to deal with additional, individual complaints by acting as judge, jury, and court of appeals. And because of my conviction that the United States holds the clear upper hand in its relations with China, I saw no need to permit any Chinese involvement in these processes.

The Phase One deal certainly can’t be relied on to eliminate or even reduce Chinese opacity. But the way the treaty reads, it doesn’t need to. The key appear to be these passages (on page 7-3), which set out the procedures to be followed if the United States and China can’t, after a series of meetings and “consultations” agree on resolving a complaint. Here’s the first:

“…the Complaining Party may resort to taking action based on facts provided during the consultations, including by suspending an obligation under this Agreement or by adopting a remedial measure in a proportionate way that it considers appropriate with the purpose of preventing the escalation of the situation and maintaining the normal bilateral trade relationship.”

“Remedial measures” clearly means punitive tariffs, and just as clearly, they can unilaterally applied.

It’s true, as some trade policy critics have fretted, that the agreement gives the Chinese the same rights – as well as the option of retaliating if Beijing believes the United States has been acting in “bad faith.”

But here’s where the nerves of steel come in. The retaliation that’s permitted isn’t tit-for-tat – as in the case of World Trade Organization (WTO) rules. Indeed, even challenging such retaliation isn’t allowed – a right that can always frustrate justice by delaying it. Instead, the retaliation required is no less than exiting from the entire deal. The system can work in America’s favor if U.S. leaders either display confidence that China won’t take such a dramatic step (because the export-heavy Chinese economy still needs the American market much more than vice versa), or if they resolve to tariff China heavily if this U.S. bluff is called.

Incidentally, the language also makes clear that, in order to go ahead with tariffs, Washington won’t need much evidence any kind of Chinese failure to respond adequately to complaints. In fact, no meaningful evidentiary standards are specified at all. In other words, it’s entirely up to the United States to decide on the threshold for action.

Can China take advantage of the same provisions? In theory, yes. But nothing in the deal would prevent the United States from treating as treaty violations any Chinese complaints it regards as unmerited – and credibly threatening to retaliate by withdrawing unless Beijing backs down.

The deal also could well prevent a big potential problem from emerging – fear of Chinese retaliation (which itself might be tough even to identify because of Chinese bureaucratic secrecy) by U.S. victims of Chinese predation (and especially by victims that are operating in China). Such fears have prevented many of these victims from complaining publicly about Chinese abuses in the first place.

But the text on pages 7-2 and 7-3 appear to permit Washington to keep the name of the plaintiff’s business confidential. So, at least in theory, problem preempted.

As suggested above, however, the deal looks so promising, and permits so much implicit U.S. unilateralism, that it’s difficult to understand why President Trump decided to proceed bilaterally t begin with. Was he worried about being criticized for being reckless and not going the extra mile to deal with the Chinese respectfully and accommodate their legitimate concerns? Perhaps. But I strongly suspect that, at least if the agreement works out as I expect, he’ll face such accusations anyway. And by negotiating, he’s lost precious time to provide tariff relief for U.S.-based producers who need it, and to permit other companies to adjust their supply chains to a new tariff-heavier era sooner rather than later (and to make adequate progress well before November, 2020).

Clearly, however, the negotiating train has left the station. And between this effective enforcement system, Chinese promises of big import increases from the United States, and steep tariffs remaining on most imports from China (which cope with the systemic issue), it looks like a major and important economic and political win for a self-proclaimed master negotiator, and the entire domestic economy – if he makes full use of it.

Our So-Called Foreign Policy: The Iran Crisis’ Real Lessons on Multilateralism

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allies, America First, Barack Obama, foreign policy, globalism, Iran, Iran deal, Iran nuclear deal, Iran sanctions, JCPOA, Joint Comprehensive Plan of Action, multilateralism, Our So-Called Foreign Policy, sanctions, Trump, unilateralism

If you think about it seriously, the main sequence of events that’s led up to the latest surge in U.S.-Iran tensions has dealt a hammer blow to the mainstream U.S. foreign policy idea that going it more or less alone is a formula for failure in world affairs, and that closely cooperating with allies is one of the biggest keys to success.

To remind: The mainstream (in the case of Iran, overwhelmingly its left-of-center wing) has been charging that the two countries have moved close to major conflict because, over allies’ objections, an America First-oriented President Trump pulled out of the deal negotiated during President Barack Obama’s administration with the European Union (EU), the United Kingdom, Russia, and China and Iran to restrain Tehran’s nuclear weapons development. And Washington then proceeded to antagonize Iran gratuitously by ramping up its own economic sanctions. As a result, Iranian leaders have threatened to start violating some of its nuclear agreement commitments, and has further protested these actions by lashing out regionally – including (as seems to be the case) attacking tankers transporting vital oil supplies through the Persian Gulf and its narrow Straits of Hormuz.

So if only Mr. Trump had listened to the allies and stayed in the agreement – i.e., if he followed an approach called multilateralism – all would be (reasonably) well in the volatile and oil-rich Gulf region. And to be fair, I myself initially bought the multilateralist reasoning when the nuclear deal (officially known as the Joint Comprehensive Plan of Action, or JCPOA) was finally reached, agreeing that without allied buy-in, the United States could never create enough pressure on Iran on its own (i.e., “unilaterally”) to prevent Tehran from going nuclear for any length of time.

And yet, as I eventually realized, this narrative held no water whatever. For the United States has proved eminently capable of inflicting major pain on Iran’s economy all by itself – by dint of its ability to deny companies that do business with Iran (including companies from allied and other foreign countries) access to the U.S. dollar-dominated global banking and payments system. America’s unilateral power, in turn, strongly reinforces the argument that the Obama administration (and the allies) could have secured much better terms from Iran than the deal currently contains.

It’s true that weakening Iran economically is no guarantee that it will turn from the nuclear weapons path. But neither is the agreement. The strongest argument made on its behalf is that it pushes back any possible nuclear-ization by roughly fifteen years. Even strong supporters, though, acknowledge it contains important verification loopholes. And had the United States remained in the JCPOA, and imposed none or few of its own sanctions, when Iran did “break out,” it would have surely been much stronger economically than otherwise – which couldn’t serve the interests of anyone worried about the Islamic Republic.       

Even more important than my own evolving views: Iran itself clearly understands the United States’ matchless leverage, too. That’s why it’s been so enraged by the American withdrawal from the nuclear agreement – even though all the other signatories remain part of the pact. Its leaders apparently understand that, in this instance, U.S. allies’ words and even deeds don’t matter much.

And as for the allies augmenting American power and influence in this episode – because their top priority (rightly or wrongly) is preserving the nuclear deal, they’re trying to frustrate American aims nowadays, not support them.

Multilateralism certainly can be a useful, effective U.S. approach to various international challenges. But contrary to the impression created by its staunchest champions, allies need to do their part, too. If consensus among all parties is lacking, multilateralism can too easily become a recipe for paralysis and inaction. In other words, like all other tools or tactics, it’s simply a tool or tactic. It mustn’t be treated as an end in and of itself.

And this caveat, of course, goes double for the United States. For as the Iran situation shows, it’s unique among the world’s major powers in having many, and robust, unilateral options.

(What’s Left of) Our Economy: With Friends Like This, Today’s World Trade System Doesn’t Need Enemies

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Bill Emmott, Chad Bown, dispute resolution, free trade agreements, Peterson Institute for International Economics, Project-Syndicate.org, The Economist, Trade, Trump, unilateralism, World Trade Organization, WTO, {What's Left of) Our Economy

One of the best pieces of advice I’ve ever received about analytical and opinion writing is “Let your adversaries hang themselves with their own words.” So on the eve of Thanksgiving, 2017, I’m especially grateful to Bill Emmott, the former editor-in-chief of The Economist magazine, for making clear why President Trump and other nationalist critics of U.S. trade policy have been exactly right in slamming as a huge mistake America’s decision to join the World Trade Organization (WTO) – the linchpin of the global trade order for the past two-plus decades.

Writing on the Project-Syndicate.org website, Emmott reports that the Trump administration has embarked on a campaign to cripple the operations of the WTO, which went into business at the beginning of 1995 and which possesses unprecedented internationally recognized authority not only to develop rules for governing many kinds of global commerce, but for enforcing them.

As with other efforts to subject countries to some legal-type checks, the ostensible purpose of the WTO was to remove power from the picture when countries negotiated trade arrangements, and especially when they dealt with the disputes over such arrangements that inevitably arise.

Many powerful critiques of the WTO have been advanced by trade policy critics across the spectrum, but I’ve always viewed two interlocking objections as supremely convincing. First, despite its lofty stated legalistic objectives, the WTO has always been as quintessentially a political organization as other international organizations, like the United Nations. Second, the politics of the WTO has always been decidedly anti-American – for the overwhelming majority of its members depended heavily on amassing big trade surpluses with the United States in order to generate adequate growth for themselves.

So Washington’s decision (backed by Democratic and Republican leaders alike of course) to spearhead the WTO’s creation and become a founding member achieved none of its promised major advantages for the U.S. economy (an impartial forum for handling trade disputes), and saddled the country with all of the major drawbacks of such a system (nullifying most of its ability to use its immense market power to resolve most of these disagreements favorably).

And wouldn’t you know it? Emmott, whose former publication was created in the mid-19^th century precisely to advocate for so-called free trade principles, strongly agrees! As he wrote in an essay yesterday:

“With the WTO essentially out of the picture, the US will launch a new initiative to strike bilateral deals on trade rules – an approach that Trump advocated in his APEC [Asia Pacific Economic Cooperation forum] speech. Given that the US remains a vital market for most exporters, such an initiative will have clout.”

Even Emmott’s suggestion that these U.S. moves will fail unwittingly confirms the case that American leverage will secure the best possible outcomes for Americans. “Asian and European countries,” he writes, “should be preparing for the worst by negotiating their own trade agreements with one another to preempt American mercantilism. After all, taking the initiative to boost trade and other commercial contacts is the best way to resist a trade war.”

What the author apparently misses is that the United States is such “a vital market for most exporters” precisely because the latter countries simply don’t believe in opening their economies to others’ goods and services any more than is absolutely necessary. It’s entirely possible that the dramatically altered circumstances created by new unilateralist U.S. policies could imbue these mercantile economies with some free trade religion. But decades- – and in some cases, centuries- – old approaches generally don’t die so easily. Moreover, if such market-opening did indeed take place, and it could be adequately monitored and enforced, why wouldn’t the United States want to take part?

Until then, however, it would make the most possible sense for Washington to proceed along the unilateralist lines Emmott dreads. For thanks in large measure to its transparent political system and strong rule-of-law tradition, the reciprocal market-opening promises offered by America in bilateral trade diplomacy will be much more credible than those made by Japan, or China, or Germany, or other major protectionist economies. The days of selling the United States much more than they buy from it would come to an end. But genuinely intelligent foreign leaders will recognize that receiving a half a loaf from dealing with Washington on this new basis is the best trade bet they can realistically hope for.

As for countries that stubbornly refuse (possibly egged on by free trade zealots like Emmott) the United States – with its considerable present degree of self-sufficiency and matchless potential for much more – will be more than capable of shrugging its shoulders and moving on.

Incidentally, as RealityChek regulars may recall, Emmott isn’t the first globalization cheerleader unintentionally to reveal that the WTO was a pig in a poke for U.S. economic interests, and indeed was created expressly to neuter American power. Chad Bown, a former World Bank economist now with the Offshoring Lobby-funded Peterson Institute for International Economics, handed trade policy critics, and the American people, a similar gift just last August.

Making News: New Op-Ed Says U.S. Trade Strategy Flawed from the Get-Go

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enforcement, environmental standards, free trade deals, labor standards, Lifezette.com, Making News, non-tariff barriers, tariffs, TPP, Trade, Trans-Pacific Partnership, unilateralism

I’m pleased to report that my latest op-ed article has just been posted this morning on Lifezette.com – which analyzes a new U.S. government report on the likely economic impact of President Obama’s Pacific Rim trade deal. The piece explains that this study makes clear not only the dangers posed by this Trans-Pacific Partnership (TPP) to America’s growth and employment performance, but why the nation’s standard goal of negotiating terms of trade with more protectionist economic powers is completely misguided.

I hope that this piece spurs major debate both on the TPP and on the potential – and indeed the superiority – of unilateralism as a new basis for America’s global trade strategy. What do you folks think?

(What’s Left of) Our Economy: On Trade, Now What?

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currency manipulation, dispute resolution, environmental standards, fast track, Financial Crisis, free trade agreements, gross domestic product, labor standards, Obama, offshoring lobby, reciprocity, recovery, rule of law, Senate, Trade, trade enforcement, Trans-Pacific Partnership, transparency, U.S. Trade Representative, unilateralism, {What's Left of) Our Economy

Although yesterday’s Senate vote doesn’t mean that President Obama’s hopes for winning fast track trade negotiating are dead, this historically trade- (and offshoring-) friendly body’s decision to delay debate with a new presidential election cycle already heating up certainly dims the odds. Just as important, their Senate victory starts putting the onus on critics to propose a new U.S. trade strategy. Here are some of my ideas.

First, about the only true statement Mr. Obama has made during the debate over a measure that would prevent Congress from amending newly signed trade agreements is that the status quo on this policy front is unacceptable. To me, the most damning indictment of the current trade landscape is my finding that the portion of U.S. trade flows most influenced by trade deals and related policies has worsened greatly during this feeble economic recovery – and slowed real growth since the last recession.  Since that article was published, that growth toll has risen to nearly 20 percent.

The answer, however, isn’t doubling down on the kinds of treaties that have produced this policy disaster. Nor is it dressing up the current framework with Congressional directives to enforce higher labor and environmental standards at foreign factories. Too many well-intentioned trade critics in particular ignore the immense difficulties Washington has had adequately regulating in the United States. As I’ve repeatedly written, the notion that huge foreign factory complexes can be monitored more effectively doesn’t stand to reason.

I’m much more sympathetic to adding what are called strong, enforceable curbs on foreign currency manipulation to the list of Congress’ mandatory trade negotiating instructions to presidents, but even this idea faces a huge problem. Many of America’s prospective trade deal partners are determined to retain the right to undervalue their currencies to undersell U.S.-origin goods and services for reasons totally unrelated to free markets or underlying competitiveness. Therefore, unless the United States wins unprecedented voting power in the dispute-resolution systems created by new trade agreements, other parties to the deal will easily be able to reject even the best-founded American complaints.

These very weaknesses in the current trade policy models supported by both supporters of current deals (and to a fascinating extent by the critics) start pointing the way to a fundamentally new approach. So do the unmistakable realities that the U.S. market is by far the biggest prize of any trade negotiations; that it enjoys a matchless potential for economic self-sufficiency; and that even though rebounding trade deficits (especially those shaped by policy) are dragging on America’s weak-enough recovery, the U.S. economy has been a global out-performer lately. (Interestingly, preliminary figures have just revealed that the chronically troubled Eurozone expanded faster than America in the first quarter of this year, but the main reasons are improving European trade balances and worsening American deficits.)

As a result, Washington should scrap its commitment to traditional negotiations and the quest for new international deals as the basis for its trade policy. Since access to the American market is so uniquely valuable to most foreign economies, and since Washington has so much more capacity to enforce laws and regulations within the U.S. economy than without, U.S. leaders should focus instead on establishing the terms of doing business in America unilaterally. Foreign governments could certainly retaliate, although the chronically lopsided pattern of global trade can leave no doubt that they’d come out the worse in any resulting “trade war.” It’s far likelier that America’s competitors would, in essence, pay to play.

And here’s another reason that any overseas protests would be short-lived: Because the United States takes seriously values like the rule of law and transparency, an exclusively American-run system for enforcing domestic trade justice would give them a much fairer shake than their own governments often give their own companies and workers in their own economies.

This new approach need not destroy all employment opportunities at America’s trade negotiating agencies. Officials at the U.S. Trade Representative’s office could still find useful work devising deals based on genuine reciprocity. But because the main foreign trade barriers nowadays consist of practices developed and carried out by highly secretive foreign bureaucracies, making evidence painfully difficult to find, determining whether such reciprocity has been achieved would be up to Washington exclusively.

Ironically, many American trade policy critics can be expected to charge that this unilateralism would trample the sovereignty of countries all around the world. But nothing could be further from the truth. Any foreign governments finding the new policy unacceptable would be perfectly free to seek growth and employment and prosperity without utilizing American demand. Of course, the offshoring lobby and various avowed free market champions will angrily condemn the new approach as neanderthal protectionism. But it’s truer to private sector norms in one crucial respect. Rather than giving away for free an enormously valuable asset like the American market, this strategy would charge a price.

Since the new strategy would represent such a dramatic and disruptive policy revolution, it’s best to phase it in – the way current trade agreements phase in agreed-on reductions or elimination of many trade barriers. Economic actors certainly deserve time to adjust. In fact, here’s a possible compromise for the squeamish: Washington could continue seeking trade deals that establish various new rules and standards for U.S. and foreign economies. But America’s role in any dispute-resolution system should be proportionate to the size of its economy in any new free trade zone. So for President Obama’s proposed Pacific Rim trade deal (the Trans-Pacific Partnership), the United States would hold nearly two-thirds of the votes, because America’s gross domestic product equals that percentage of the prospective free trade zone’s economic output. Surely that’s more equitable than the standard one-country-one-vote approach.

These ideas are strong medicine, to be sure. But critics should keep in mind that the historic imbalances produced by America’s current trade strategy helped set the stage for last decade’s financial crisis and its dispiriting aftermath, and that even despite the slow U.S. and global recoveries, trade flows are becoming similarly lopsided again. I’m perfectly willing to acknowledge that superior approaches might be developed. But what have their creators been waiting for?